PM Daily Market Commentary - 10/4/2016

Gold cratered, dropping -43.50 [-3.31%] to 1270.50 on very heavy volume, and silver plunged -1.03 [-5.44%] to 17.83 on very heavy volume also. The ECB threats to potentilly taper their bond-buying QE program caused a dollar rally, and encouraged most everything else to sell off - most especially gold and silver.

After the open in Asia, gold moved slowly lower until about 8:15 Eastern - at that time, gold simply fell off a cliff. Once gold drove through the previous low at 1302, it simply kept on selling off until the trading day ended. Gold closed at or near the dead lows of the day, on very high volume. Today's "bear strong line" candle provides no hints of a posible reversal.

December rate-rise projection is at 55%, down 3% from yesterday.

Gold open interest at COMEX fell by -6,439 contracts.

Silver followed through off yesterday's uptrend line break, and blew through its previous low of 18.42 on heavy volume, closing near the day's low much like gold. Yesterday's break below the uptrend line was the tell for PM. The ugly red candle provides no suggestion of a reversal at all.

GDX plunged -9.86% on very heavy volume, while GDXJ dropped -10.86% on very heavy volume also. Because gold had already broken down prior to the US market open, miners gapped down at the open and just continued to sell off all day long, closing right at the lows of the day. The "black marubozu" candle is quite bearish, and shows no hint of a possible reversal.

Platinum fell -2.23%, palladium dropped -1.72%, and copper moved down -1.00%, with copper printing a swing high on the day. It was a bad day all around for both metals groups, but gold and silver were hit by far the hardest.

The buck rallied today, up +0.54 to 96.10, making a new high and closing above its 200 MA. While the dollar move wasn't the proximate cause of the dramatic breakdown in PM, to me the dollar rally reinforced the theory that the ECB's taper threat was largely responsible for the breakdown. All the markets moving together says this wasn't just some attack on gold alone.

Crude bucked the trend today, continuing to move higher, closing up +0.54 [+1.11%] to 49.19. The entire move came after a bullish-looking API report (a -7.6 million barrel inventory draw) hit at 16:30. The late-day rally caused oil to close above the previous high set back in mid-August. This marks the fifth straight up day for oil. Prior to the API report, oil seemed set to close down.

SPX fell -10.71 [-0.50%] to 2150.49. Financials were the only green sector (XLF:+0.42%) while utilities continued their vicious sell-off (XLU:-2.09%). This combination suggests the market is concerned about a potential rate increase - this time by the ECB's threat to taper QE purchases. VIX rose +0.06 to 13.63.

TLT plunged -1.17%, falling for the third straight day. TLT has moved back into a downtrend.

JNK was mostly unchanged, down -0.11%. JNK made a new high early in the day but was unable to hold onto its gains.

CRB rallied +0.15%; managing to move higher in spite of the sell-offs in PM and industrial metals.

Yesterday's breakdown in silver and the miners were the tell for what happened today. Is it possible that someone knew what the ECB would do and sold off their PM positions in advance? Maybe so. Intraday, there were no hints of buyers showing up. It will be interesting to see what happens in Asia tomorrow. As I write this, gold and silver have bounced modestly, but so far no huge flood of buyers have appeared to push prices higher.

Yesterday I encouraged you to be careful out there. That still holds. While PM is clearly in oversold territory, the massive red candles today are not reversal bars; risk is high that prices have further to fall. Ideally, we sell off more tomorrow, the dip is bought and we get a clear reversal candle pattern that we can buy more safely.

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3 Comments

Thanks for the comments yesterday. I agree with you that nobody really knows exactly what CBs will do. I also agree that commercials can have more control when buying enthusiasm isn't there.

First, re: CBs, my belief is that CBs can't engage in normalization without cratering the economy, because it's just too weak, plain and simple. A 25 basis point wink and nod hike probably won't do it. But real normalization, which *should* be dollar bullish and *should* be gold bearish is unlikely in my view, for the reason stated above. That doesn't mean I know what they will do. For all I know, they'll all begin tightening and crater markets and economies, and we all reset. But my point is simply that if past performance is at all indicative of future results, the ECB taper talk is just another example of more jawboning, just like we see every day with the Fed officials coming out and trying to talk the markets around. Either way, price action is all that matters in the end. As long as the market responds predictably to jawboning, they'll keep doing it.

Last, re: Gold, buying enthusiasm has definitely dried up, while we await the next crisis/uncertainty/loss of confidence in the system. In the meantime, the smart money knows where the key levels on the charts are. Once those levels are breached in either direction, trades are triggered. Outside of a broad-based major reason to buy PMs/PM stocks, the easy money is to the downside, which can be easily triggered by naked shorting, dumping huge sell orders on the open market, price rigging, etc. This happens a lot with PMs. That manipulation in and of itself can have a detrimental effect upon sentiment, which becomes a vicious cycle until the tide turns (i.e. an event that scares the masses into PMs). Right now, PMs need a reason to move higher. The risks in the world to the markets, the global economy, and the geopolitical landscape far outweigh the negative effect of a 25 basis point Fed rate hike or an ECB meeting where the result is to do nothing. However, those two things have allegedly had a FAR more profound effect on the PM space than all of the combined real land mines out there, waiting to be stepped on...any one of which could start the domino drop. That doesn't seem logical to me, but it is what it is. And again, in the end, price is really the only thing that matters.

I agree, true normalization can't happen, everything would simply blow up. But those bankers sure do want higher rates than they have now. I suspect there's a decent chance that when the banks want something, they'll end up getting at least a portion of what they want. And that probably translates into the ECB pulling back from QE. If negative rates really are helping to kill DB, then I'd guess Merkel will see to it that QE comes to an end. No way she wants to bail out DB. And I'm guessing what she wants will override the other considerations.

I think part of the answer as to why gold hasn't taken off is that "normalization of deviance" concept; actions that were thought of as crazy ten years ago are now seen as normal, or at least, no big deal. We've dodged so many bullets that many participants now assume we are more or less bulletproof. How many times must you bail out of your positions, only to see things reverse and continue higher after our central planners avert disaster once again?

Take as example the Italian banking crisis. There was only a modest bank run, Italian sovereign debt moved but not that much, the Euro didn't really move - it was a very ho-hum affair. It still hasn't been resolved yet, but nobody seems to care. Even DB, which is clearly sick, hasn't materially affected US bank stocks, which are presumably linked to DB through derivative trades.

I think for something to really happen, we'll need a nation to exit the Euro, and then default on its debt. That would do it. No papering over those losses.

Agreed, Dave. It seems like everyone feels like there's no real risk. Every time there is a hiccup, there is a CB backstop. Nothing can break as long as CBs have our backs. That's right. Nothing can break, until it does. We'll see if they can save DB. I don't think they will let it fail. That would surely result in something that we would feel. Anyway, I guess we'll see how long they can hold it together.